The Tohoku and northern Kanto regions severely damaged by the
Great East Japan Earthquake had been populated by many firms
that produce materials (such as metals and chemicals) and parts
of motor vehicles and electronics. The disaster damaged these
firms and stopped their production activities; it also stopped
or diminished the production activities of
non-disaster-affected firms that used the products of the
disaster-damaged firms, because of the shortage of those
intermediate inputs. This phenomenon of disrupted supply chains
amplified the impacts of the disaster on manufacturing
production and expanded the impacts broadly to other
(non-damaged) regions in the country.

The impacts of the disruption of supply chains have been the
largest in the transportation equipment industry that includes
manufacturing cars, trucks and their parts. According to
statistics from Japan’s Ministry of Economy, Trade, and
Industry (METI), the total manufacturing production in March
2011 was 15.5 percent lower than that in the previous month,
which was the largest decrease for 58 years since the
production index was established. More than a half of this
decrease was due to a drop in production in the transportation
equipment industry, which experienced a 46.7 percent decline in
March 2011, the disaster month. The industry further decreased
production by 1.9 percent in April, while the total
manufacturing production recovered by 1.6 percent in the same
month. This large impact on nationwide manufacturing production
should indicate the complexity of today’s supply chains that
have been globally constructed for production efficiency and
cost minimization. It may also be that intermediate products
supplied by the disaster-damaged firms had been so specialized
that the “downstream” producers cannot readily switch to
alternative products or suppliers. The large nationwide
decrease in manufacturing production in March likely is not
solely due to the disrupted supply chains but also to the
rolling electricity blackouts prompted by the accident at the
Fukushima Daiichi nuclear power plant. Rolling blackouts were
not implemented in April.

An initial fear was that the impact could become more severe if
the disruption of the supply chains continued. If “downstream”
producers, such as a General Motors truck plant in Louisiana,
anticipated that the shutdown or partial operation of the
disaster-damaged firms, they might seek material from other
firms to maintain production. With the global nature of supply
chains, those alternative suppliers could be in other
countries. One concern is that if new supply chains are
established, Japanese firms damaged by the earthquake and
tsunami might find they are excluded from the market when they
are able to restart manufacturing of intermediate products.
This scenario could permanently lower Japan’s manufacturing
production and exports.

However, the operation of the disaster-damaged Japanese firms
and the supply chains recovered very rapidly, due to large
efforts of those firms themselves as well as related
“downstream” producers to recover. A METI survey shows that, as
of early April, more than 60 percent of the damaged firms have
been restored, and another 30 percent were expected to be
restored by summer 2011. Their actual restoration seems to have
been even faster.

There are a variety of ways to respond to such a risk. One way is
to make sure there are multiple suppliers. Another way is to
increase in-sourcing; this is what I speculated might happen as
risks of disruptions abroad increased, and transportation costs
remained elevated
[2]
[3]. Figure 5 illustrates how the surveyed firms are
considering responses to these perceived risks.